Arvind Demerger: Destroyer of Wealth
|Arvind Ltd: Segment Revenue ( Rs. Cr)|
Arvind Fashions Ltd.
|Arvind Fashions Ltd: Segment Revenue (Rs. Cr)|
On 28th November, 2018, Arvind Ltd. demerged it’s fashion and engineering businesses and opened up two new companies. The fashion business was handled by Arvind Fashions Ltd. And the engineering was taken over by Anup Engineering Ltd.
The arrangement stated that for every 5 shares of Arvind Ltd. The shareholder would get 1 share of Arving Fashions Ltd, and for every 27 shares of Arvind Ltd. The shareholders would get 1 share of Anup Engineering Ltd.
On 27th November, 2018, the stock was trading at Rs. 311.45. However, on the day of the demerger, the share price crashed tremendously. The closing price on the day of the demerger was Rs. 109.
Anup Engineering was listed on the BSE on 1st March, 2019 and Arvind fashions was listed on 8th March, 2018
Let us assume that Mr. X bought 135 shares of Arvind Ltd on 27th March, 2018 for Rs. 310. So, his total investment would be Rs. 41850.
After the demerger, he would have 135 shares of Arvind Ltd. 27 shares of Arvind fashions Ltd. And 5 shares of Anup Engineering Ltd.
The earliest he can sell all the shares off together is on 8th March, because the last company got listed on 8th March.
On 8th March, Arvind Ltd was trading at 84.10, Arvind Fashions was trading at 621.3 and Anup engineering was trading at 549.65
So if Mr. X sold the shares of at this rate, he would get Rs. 30876.85. He would make a loss of Rs. 10973.15, that comes out to be a loss of 26.22%.
If he sold Anup enginerring for 650 in 18th March, Arvind Ltd for Rs. 95 and Arvind fashions for Rs 1050 on 26th March. He would get Rs. 44425. This is probably the only possible scenario where Mr. X would earn Rs. 2575 on his investment. This turns out to be a gain of merely 6.1% over a span of 5 months.
The above illustrations show that the demerger was not a profitable opportunity. Arvind Ltd has been falling ever since and there is a very low possibility anyone would have made money in the past few months if they had bought Arvind Ltd just before the merger.